Different Trade and Industrial Zones in the UAE and Their Various Strategies for Growth - Assignment Example

Name Tutor Course Date UAE: Industrial Zones/ Shipping hubs and Logistics Compare the different trade and industrial zones in the UAE and their various strategies for growth In the wake of Globalization and trade liberalization, many countries have embarked on export-led development as opposed to import-substitution. In this context, industrial zones, defined as a self-contained geographical area with high quality infrastructure facilities, which house business of industrial nature, remain vital instruments to local development (Falcke, 1999). The UAE is characterized by various industry zones in different emirates. Realizing how important and crucial the manufacturing sector’s role in diversifying the economy, the government undertook various innovative policy initiatives which supported the growth of trade and industrial zones. Among non-oil sectors, UAE Manufacturing is the 2nd powerful economic growth driver. One of these zones is the Industrial City of Abu Dhabi (ICAD I, ICAD II, ICAD III) and Al in Industrial City (I and II) which are managed by Higher Corporation for Specialized Economic Zones ( ZonesCorp) and commonly referred to as industrial zones of special economic nature (Ashai et al, 2007). ICAD 1 which is the first industrial zones within Industrial City of Abu Dhabi covers an area of 14sq km is strategically located near to Musafah Sea Port and in a close vicinity of Abu Dhabi International Airport. It covers an area of 14 sq km. Its roads are built as per the most up-to-date global standards and criteria and have a main Administration Centre as well as other utilities like:  lodge, artistic centre, trade centre, banks, shopping malls and health clinics as well as a suburban place/area for employees prepared with all the necessary services and public utilities. It includes industrial zones for foundation metals, construction goods, electronics, plastics producing and automotive manufacturing and by now has attracted US$2.99 billion in investment (Nan, Yiqun and Yuan, 2009). One of the industrial zone’s unique feature and strategy is that all governmental departments concerned with the issuing of industrial licenses are located in one place. This is quite strategic in that it can facilitate the work of investors; help them to safe time and efforts, and to concentrate on establishing their business so as to start producing their products as soon as possible. Apart from this, this industrial zone offers a 100% is the occupation rate which is quite strategic in attracting investors (Ashai et al, 2007). The other zone is Al Fayah Industrial Zone, A Dh8 billion (USUS$2.17bn) industrial zone in the Abu Dhabi desert which included construction and building materials firms.  One key feature in this zone is the site, 75km east of the capital, an indication of the government commitment to move industries away from suburban places and ease overcrowding. Al Ruwais Industrial Complex, located about 240 km west of Abu Dhabi, is yet another industrial zone that was developed by Abu Dhabi National Oil Company (ADNOC) and hosts a number of petrochemical industries. It includes an oil refinery plant, natural gas liquids fractionation industry, a fertilizer plant, a marine terminal and sulphur handling terminal. A good example is Al Ruwais Refinery industry which produces a capacity of 120,000 barrel of oil on a daily basis. Its key strategies to growth include provision of comprehensive range of specialized and customized services, catering to the industry requirements of Construction, Oil and Gas E&P, Seismic and Survey and Dredging majors, fully supported by our team of professional and experienced personnel in location and from within the ISS network. In addition, it maintains a close contact with various government authorities including Port, Customs, Coastguard and the Critical National Infrastructure Authority, which controls the oilfield areas in the Emirate. Mussafah Industrial zone, situated 30 km from the Abu Dhabi city centre adjacent to Mussafah Port, is managed by Abu Dhabi Municipality. It covers 14 km² and is made up of six varieties of industrial zones based on their activities. Some of the industries in this zone include Automobiles, Machineries, Textile, Soft drink manufacturing Chemical, Plastic, and Petrochemical among others. Just like other industrial zone, Mussafah’s close proximity to a port is one of its key strategies to attract investors and growth, capitalizing on not only water but also good road transport. Khalifa Industrial Zone Abu Dhabi (Kizad) is yet another example of industrial zones in UAE. It is quite big covering an area of 417sq km. It is unique with a world-class transport infrastructure via air, road, sea through the adjacent Khalifa Port and rail networks, which gives tenants or investors significant network of connectivity and outstanding access to markets due to its strategic location which can tap into a market of more than four and a half billion consumers within four time zones of Abu Dhabi. Apart from the difference highlighted above, all indusial zones in UAE are also similar on various grounds: All of these industrial zones are strategically located to attracting investments. They are also served by a wide range of transportation nodes in the region in the form of airports, railway terminals and road networks both from raw material sources and to end-use markets. But more importantly, they tend to favor areas near the region of important markets opportunities. Discuss the transportation and transportation infrastructure in the UAE and touch on the contribution of UAE’s sea ports on the UAE economy. The UAE has a modern infrastructure, state of art road and developed sea port that has made it a regional transportation center. UAE has had rather a massive infrastructure spending and to date it has succeeded in creating, a world-class infrastructure in transportation (seaport, airports, and roads), energy, communications, and tourism. This infrastructure is a powerful asset and plays a significant role in persuading industries to establish in the country The transport and logistics huddle is an imperative sector in the UAE economy, including 10.4% of non-oil GDP in 2005 (Ashai et al 2007). Seaports and waterways act as a fundamental economic link by bringing products and services to individuals allover the world. They comprise a vital connection in the larger trading chain. Mostly, their level of effectiveness and performance establishes a nation’s competitiveness (Nan, Yiqun, and Yuan, 2009). The significance of seaports in the competent working of an economy cannot be understated because all products and passengers transported via sea need the use of, at least, two ports. In most nations, mainly global trade, and in a number of cases as well big shares of local trade, is conducted via maritime transport. The UAE seaport complimented by its border securities which are at par with international standards and are constantly being upgraded as foreign trade, has significantly improved the economy and currently one of the most important sectors in UAE. In 2010, the seaports together and airports contained more than Dh654 billion in sum trades. (Middle East news, November 2011). New market opportunities arise from convergence of transportation Since UAE is a sea hub thus offers new potential markets. How do ports and logistic infrastructure make it easier to make business in the UAE? Ports and logistics are interlinked. A port is essentially a point where goods are transferred from one mode of transport to another whereas logistics is a procedure to optimize all activities to ensure the delivery of cargo through a transport chain from one end to the other. The comparative efficiency of a country’s trade logistics chain is of vital importance in enhancing competitiveness of its industry and commerce (UN, 2002). The UAE logistics division is the access to trade in the Middle East that has become among the best world’s trading areas following expanding of its economy into non-oil goods and services. International trade inside Gulf countries have improved a lot as the year’s passes as well the UAE’s logistics business has too developed astoundingly. The UAE has protected its position in the globe as a local trade center between Europe and Asia. Nowadays, the UAE logistics business is in a situation to take advantage of the rising trading opportunities between the two counties since of its tactical geographic place and ease of access. The leadership of the country is also paying great attention to this sector. Port and logistics also facilitates opening up of new markets enhanced by transportation and accessibility. UAE has ease of access to over 2 billion inhabitants in South and West Asia, the CIS and Africa (Balakrishnan, 2009). Ports sometimes are involved in value addition hence improving the products. According to the report by UN (2002) both logistics companies and shippers agree that value added services in logistics centers are important in supply chain management, and this tendency is expected to continue in the future. Value-added logistics (VAL) services include extra roles and functions than the present services and may comprise inventory management, assessment, classification and packing, bar coding, order picking and invalidate logistics. In UAE, Abu Dhabi Ports adopted a new role of value addition in trying to be competitive in the market. Does it give suppliers an initiative (does it gives suppliers a push to produce more)? Suppliers can be given an initiative in several ways. The facilities and incentives provided in the various industrial zones make the incorporation of companies/suppliers in the UAE an effective ground for international business operation. Such an activity has greatly attracted large foreign investments which boosts the level of investments in the region hence increased capital accumulation which strengthens the economic growth of the region. Again, Companies or suppliers can make significant savings taking advantage of these incentives For instance in logistics, Value-added logistics services such as delayed manufacturing can be made through the international procurement of raw materials and regional assembly (UN, 2002). In addition, businesses or firms have also been able to withstand and compete favorably on the global markets. PART B 1. GDP and Industrial Zones How much does Industrial Zones contribute to the GDP? Industrial zones have been designated to attract investment and contribute in promoting the UAE and its vital economic sectors. Dubai municipality for instance, has elected seven areas including, Al-Khubaisi, Al-Qusais, Al-Rumool, Al-Aweer, Al-Quoz and Al-Safa. These areas are zoned for light, medium, heavy and hazardous industrial activity. The other emirates have as well selected regions for business with Abu Dhabi, for instance, apportioning 1400 hectares in Musafah and 400 hectares in Al Ain. In terms of GDP contribution to UAE’s economy, industrial sector generally represents a half(50%) of the country’s economy, which includes manufacturing, the largest non-oil economic sector in the country contributing AED 13% of national GDP, construction AED 8% of GDP and crude oil production 27% (Zaid Ashai et al,.2007) According to Pradhan, real GDP from Manufacturing alone rose from 0.9% in 2001 to 13.5% in 2006 (Pradhan, 2009) Manufacturing, contributing around AED 14% of GDP and around one fifth of the entire non-oil economy. Growth in manufacturing can be attributed to increasing demand as a result of a rapidly population growth as well as the increased export-oriented supply facilitated by the expansion of industrial zones. Does Industrial Zones affect the aggregate Supply parameters of Technology, Labor, Physical Capital, Human Capital, and Natural Resource? Industrial development and designation of industrial areas affect the aggregate supply of technology, labour, physical capital, human capital and natural resources in the following grounds: Industries and companies may have to commit themselves to higher levels of investment to keep pace with the shifting frontier of technology and remain competitive, keeping abreast of new developments, satisfying the wide range requirements of customers, meeting market demands profitably as well as keeping ahead of their competitors (Subramani, 2004). On the other hand, expansion of industries and manufacturing companies tends to draws more labor from the subsistence sector. This causes the aggregate supply of labourers who generally move from the subsistence sector mostly unskilled giving rise to the possibility of creating new industries and expanding existing ones at the existing wage rate. The aggregate supply of physical capital is likely to be triggered by the expansion of industries. Physical capital entail virtually everything other than land and labor such as the equipment, raw materials, and other physical objects used by a firm to produce its goods and/or services. Similarly, aggregate supply of human capital is like to rise as adoption of new technologies increases in manufacturing companies and industries however the aggregate supply of natural resources may diminish as a result of overexploitation (Ashai et al, 2007). Does Industrial Zones impact on investment which is the driver for growth in any nation? Industrial Zones does impact on investment of any country on several grounds but not limited to the fact that they provide both policy and infrastructure benefits for instance, fiscal incentives, streamlined regulations and administrative controls which are generally geared towards to enhancing competitiveness while reducing the costs of business entry and operation. Likewise, associated physical infrastructure is aimed at enhancing the competitiveness of manufacturers, realizing the agglomeration benefits from concentrating industries in a single geographical area, and reducing urban congestion (Subramani, 2004). Industrial zone are also basically Platforms to attract foreign direct investment in new industries. For instance most new zone programs, particularly in the Middle East including UAE, are majorly designed to attract foreign investment in value-added activities. Industrial Zones are basically ideal arena for investment climate. In UAE for instance, the success story of different zones is 100% foreign ownership, corporate tax holidays, no personal taxes, freedom to repatriate capital and profits, and no import duties or currency restrictions however outside these zones were characterized by corporate tax holidays for most sectors, no personal taxes, freedom to repatriate capital and profits, and no currency restrictions while Foreign ownership is generally set at a ceiling of 49%, though that is changing with the UAE’s commitments to the WTO. 2. Unemployment and Industrial Zones How much do industrial zones impact on employment in the UAE for all UAE residents and nationals in specific? Industrial zones are frequently considered key instruments in the array of policy tools adopted by countries to liberalize markets, attract foreign direct investment, stimulate exports and economic growth, but most importantly acted as “Pressure valves” to alleviate growing unemployment while improving the transfer of technology and the acquisition of skills by the national work force. In UAE, Industries (incorporating mining, manufacturing, building, and power) employed approximately 36 percent of the labor force in that year in 2005 with main heavy industries in and the mass of manufacturing industry located in the Jabal Ali Free Zone in Dubai and the Jabal az Zannah-Ar Ruways industrial zone in Abu Dhabi. Manufacturing alone employed 13 percent of the workforce in 2004. 3. Monetary Policy and Industrial Zones Does Industrial Zones impact on the money supply? Money supply is simply the total amount of money available for transactions and investment in the economy or within a region. Arguing from this definition, industrial zones do affect this money supply partly because the major aim of designating these areas is to generate employment opportunities by attracting investors among other things. Thus more firms or industries in these areas only means more employment consequently availability of money to spend. This is corroborated by Magazzino, who argue that according to Wagner’s Law (Wagner, 1883, 1912) public expenditure tends to increase in the process of economic development. His reasons are varied but limited to the fact that public functions substitute for private activities and due to the fact that development results in an expansion of expenditure on culture and welfare (Magazzino, 2011) in a supportive mood, Ogunmuyiwa and Ekone (2010) argue that there is a close relationship between economic growth and money supply. Designation of industrial zones significantly contributes to GDP and economic growth which corresponds to money supply. Does the UAE monetary policy impact Industrial Zones? Monetary Policy relates to the process by which the government central bank of a country controls the supply, availability, and cost or interest rate of money (Pradhan, 2009). The policy is often used as a means in to meet certain economic objectives of the country, which are usually focused on the growth and strength of the economy. On the same vein, Nasir and his colleques argue that the policy is related to the decisions regarding optimal amount of money and interest rate prevailing in the economy. It is concerned with money making, level of best interest rate and with level of inflation in the economy (Nasir et al. 2010). Like any other country aiming at economic growth, The United Arab Emirates (UAE) also practiced this aforementioned monetary policy. It did so in response to its previous economic turmoil as well as the overall goal of developing its economy. In the recent past, domestic liquidity in UAE increased with increased capital, higher oil prices and increased credit creation by local banks. Against this background of fixed peg of the AED against the US dollar and the full and free flow of capital, the efficiency of monetary policy in the UAE is quite limited. Local interest rates follow the interest rates on the dollar, and therefore the Central Bank attempts to manage fluctuations in domestic liquidity through certificates of deposit. Other measures taken by the central bank include capital ratio, risk assessment by the central bank, loan to stable resources ratio, limits on personal loans, limits on large exposure among others (Hassanain, 2007). Having highlighted the aforementioned background, the question is whether UAE monetary policy impacted on industrial zones. The answer is yes. It encouraged more industries as the monetary policy was not so tight otherwise it would have squeezed the companies’ profits and even raising their production cost. 4. Fiscal Policy and Industrial Zones Does the UAE fiscal policy affect Industrial Zones? Fiscal policy matches up to levy and expenditure decisions of the government. It is basically the use of government spending and taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable growth, to maintain high employment level in the economy while reducing poverty (Nasir et al. 2010). The UAE upholds the principle that income tax exemptions support a more energetic private sector growth. Generally all the industrial zones benefit from zero income tax. The UAE also adopt other strategies geared towards economic improvement since it believes that a balanced public budget is essential and conducive to economic growth in the long run. As a result of above measures, total public revenues have increased from AED 77 billion, in 2003, to AED 94.4(22.6%) billion in 2004. This was mainly attributed to the increase in oil and gas earnings and increased returns from customs from AED 2.4 and 3 billion in 2003 and 2004 respectively. As a result of these measures, the public deficit significantly reduced or diminished to AED 855 million in 2004, or less than 1% of total public expenditures. 5. Trade and Industrial Zones Does Industrial Zones influence the overall trade’s balance of the UAE? Industrial zones have an influence on the overall trade’s balance of the UAE. Though they promote economic growth as observed earlier, the growth itself may have a negative impact on the trade balance. Development of industrial zones and establishment of more manufacturing firms may attract more labor in the sector and thus impact negatively on the previous primary sectors which enhanced production of domestic goods. It has been generally argued that when foreign demand for domestic goods increases, the country is to import in a first time in order to improve its productive capacities, resulting in worsening trade balance. On the other hand, in a next time, once the cumulated capital inventory became enough, the trade balance gets better under the influence of local exports high development. This may explain the trend in the UAE. According to research done KAMCO, Free zone or industrial zones export of UAE witnessed a decline of 1% AED 96.2 billion(USD 26.2 billion) in 2009 as opposed to 16 percent increase in 2008 revealing a negative balance of trade (KAMCO Research, 2011). From the foregoing sections, it is clear that industrial zones do play a significant role of the UAE Economy by attracting foreign investment and generating employment for the local however, more actions are needed to curb few challenges that may hinder these investments. Works Cited Balakrishnan, M. Stephens. Approaches to enter emerging markets: A UAE case study, 9th Annual Hawaii International Conference on Business, Hawaii, 2009: 1-28. Caj O. Falcke. Industrial Parks: Principles and Practice Journal of Economic cooperation Among Islamic Countries Vol 20(1) 1999: 1-10 Cosimo Magazzino. Disaggregated Public Spending, GDP and Money Supply: Evidence for Italy European Journal of Economics, Finance and Administrative SciencesISSN (2011) 1450-2275 Gatetley. Middle East news, November 2011 Hassanin. Money Control in UAE Middle Eastern Finance and Economic s ISSN: 1450-2889 Issue 1(2007) 35-44. KAMCO research. UAE economic Brief and Outlook, April, 2011 Li Nan, Han Yiqun, Xu Yuan. Privatization and Deregulation of the seaport industry: Economic Analysis and policy Choice, Journal of Macuo Polytechnic institute 2009: 136-139 Muhammad Nasir, Afaque Ahmad, Amanat Ali and Faiz-Ur-Rehman. Fiscal and Monetary Policy Coordination: Evidence from Pakistan International Research Journal of Finance and Economics ISSN 1450-2887 Issue 35 (2010)pp 202-213 Ogunmuyiwa, M. S. and Francis Ekone A. Money Supply - Economic Growth Nexus in Nigeria J Soc Sci, 22(3): 199-204 (2010). Samir Pradhan. The UAE’s Economic Policy and the Current Global Meltdown: An Appraisal, Gulf Research Center, August 2009, Working Paper Series, No. 09-04 Subramani M. How do suppliers benefit from information technology use in supply chain relationships? MIS Quarterly, 28 (2004) 45 - 73. United Nations. Economic and Social Commission for Asia and the Pacific Commercial Development of Regional Ports as Logistics Centres United Nations, New York, 2002. Zaid Ashai, Mohamed El Dahshan, Joanne Kubba, Hilla Talati and Parastou Youssefi. The Transport and Logistics Cluster in the United Arab Emirates Microeconomics of Competitiveness Group Project May 2007. Read More